A case for reassigning GST to States

Subject : Economy

Section :Fiscal Policy

Concept :

The vertical fiscal imbalance (VFI) arises between the Union and State governments when the Union has more tax powers than the States and the State governments are assigned with more expenditure responsibilities.
It is the responsibility of the Finance Commission to correct this imbalance.
In the context of Goods and Service Tax (GST), the Union and State governments concurrently levy GST on commodities with 50% as Central GST (CGST) and 50% as State GST (SGST).
There is also an Integrated GST (IGST) on inter-State trade so that 50% of it goes to the final destination state.
States do not have the power to unilaterally change the tax.

Vertical Fiscal Imbalance:

In simple terms, VFI equals ‘one minus the ratio of the State’s own revenue to own expenditure’.
If the VFI ratio is zero, it implies that States have enough revenue to meet their own expenditure. In this case, there is no need for financial transfers.
VFI for all the States together can also be calculated.

Some of the findings are:

VFI showed an increasing trend in the last three Finance Commissions (2005-06 to 2020-21).
The ratio was 0.530 from 2015-16 to 2020-21. This implies that only 47% of the States’ own expenditure was financed by their own revenue.
State revenue structure was transformed and they became more dependent on the Union Government.

The four major changes that took place in this period were:

The divisible taxes of the Union government increased from two to all the Union taxes. It enlarged the revenue base to be shared with the States.
Fiscal responsibility law was implemented to limit the fiscal deficits of the States.
The planning commission was dissolved which led to the withdrawal of Plan grants.
GST was introduced in 2017.